Taxation of Individuals & Business Entities Brian Spilker 11e - Test Bank

Taxation of Individuals & Business Entities Brian Spilker 11e – Test Bank

 

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Sample Questions Are Posted Below

 

Taxation of Individuals and Business Entities, 11e (Spilker)

Chapter 6   Individual Deductions

 

1) The profit motive distinguishes “business” activities from “personal” activities.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

2) All business expense deductions are claimed as “below the line” deductions.

 

Answer:  FALSE

Explanation:  Most business expenses are claimed as for AGI deductions.

Difficulty: 2 Medium

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

3) All investment expenses are itemized deductions.

 

Answer:  FALSE

Explanation:  Rental/royalty deductions are “above the line” deductions.

Difficulty: 2 Medium

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

 

 

4) Rental or royalty expenses are deductible “for” AGI.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

5) To be deductible, business expenses must be directly related to a business activity.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

6) The phrase “ordinary and necessary” means that an expense must be appropriate and helpful for generating a profit.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

7) All reasonable moving expenses are deductible by employees.

 

Answer:  FALSE

Explanation:  Moving expenses are generally not deductible.

Difficulty: 1 Easy

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

8) Self-employed taxpayers can deduct the cost of health insurance as a “for” AGI deduction as long as they do not actually participate in their spouses’ employer-provided health plans.

 

Answer:  FALSE

Explanation:  A self-employed individual cannot be eligible to participate in a plan.

Difficulty: 3 Hard

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Analyze

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking

 

9) Self-employed taxpayers can choose between claiming a deduction or a credit for the employer portion of self-employment taxes paid.

 

Answer:  FALSE

Explanation:  An above-the-line deduction for the employer portion of the SE tax is available.

Difficulty: 1 Easy

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

10) An individual who forfeits a penalty for prematurely withdrawing a certificate of deposit (CD) is allowed to net the penalty against the interest income from the CD.

 

Answer:  FALSE

Explanation:  The early withdrawal penalty is treated as an above-the-line deduction.

Difficulty: 1 Easy

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

 

 

11) Excess business losses are carried back and then forward as net operating losses.

 

Answer:  FALSE

Explanation:  Excess business losses are carried forward as net operating loss carryforward.

Difficulty: 1 Easy

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

12) For married taxpayers filing separately, excess business losses are defined as aggregate business deductions over the sum of aggregate business gross income or gain of the taxpayer plus $255,000.

 

Answer:  TRUE

Explanation:  The threshold amount for all taxpayers other than those married filing jointly is $255,000.

Difficulty: 1 Easy

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

13) Qualified education expenses for purposes of the deduction of interest on educational loans are expenses paid for the education of the taxpayer, the taxpayer’s spouse, or a taxpayer’s dependent to attend a postsecondary institution of higher education.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

 

 

14) The medical expense deduction is designed to provide relief for doctors and medical practitioners.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

15) Deductible medical expenses include payments to medical care providers such as doctors, dentists, and nurses and medical care facilities such as hospitals.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

16) Taxpayers traveling for the primary purpose of receiving essential and deductible medical care may deduct the cost of travel.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

 

 

17) The deduction for medical expenses is limited to the amount of unreimbursed qualifying medical expenses paid during the year reduced by 2 percent of the taxpayer’s AGI.

 

Answer:  FALSE

Explanation:  10 percent of AGI is the floor limit.

Difficulty: 1 Easy

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

18) The itemized deduction for taxes includes all types of state, local, and foreign taxes.

 

Answer:  FALSE

Explanation:  The deduction is limited to state, local, and foreign income (or sales taxes); state or local property taxes; and state or local personal property taxes, based on value.

Difficulty: 3 Hard

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking

 

19) Taxpayers may elect to deduct state and local sales taxes instead of deducting state and local income taxes.

 

Answer:  TRUE

Explanation:  Taxpayers may elect to deduct state and local sales taxes in lieu of deducting state and local income taxes.

Difficulty: 2 Medium

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

 

 

20) Taxpayers are allowed to deduct mortgage interest on up to $1,000,000 of acquisition debt for their qualified residence if the acquisition debt is incurred after December 15, 2017.

 

Answer:  FALSE

Explanation:  The limit is $750,000 for acquisition debt incurred after December 15, 2017.

Difficulty: 2 Medium

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

21) The deduction for investment interest in excess of the net investment income carries forward to the subsequent year.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

22) To qualify as a charitable deduction the donation must be made by cash or by check.

 

Answer:  FALSE

Explanation:  Donations of property also qualify.

Difficulty: 1 Easy

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

 

 

23) In general, taxpayers are allowed to deduct the fair market value of long-term capital gain property on the date of the donation to a qualified charitable organization.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

24) The deduction to individual taxpayers for charitable contributions paid in cash to public charities is limited to 10 percent of the taxpayer’s AGI.

 

Answer:  FALSE

Explanation:  60 percent of AGI is the ceiling for donations of cash to public charities.

Difficulty: 2 Medium

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

25) Unreimbursed employee business expenses and hobby expenses are not deductible.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

26) Bunching itemized deductions is one form of tax evasion.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  The Standard Deduction

Learning Objective:  06-03 Determine the standard deduction available to individuals.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

27) Taxpayers generally deduct the lesser of their standard deduction or their itemized deductions.

 

Answer:  FALSE

Explanation:  Taxpayers generally deduct the greater of their standard deduction or their itemized deductions.

Difficulty: 1 Easy

Topic:  The Standard Deduction

Learning Objective:  06-03 Determine the standard deduction available to individuals.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

28) Taxpayers filing single and taxpayers filing married separate have the same basic standard deduction amount.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  The Standard Deduction

Learning Objective:  06-03 Determine the standard deduction available to individuals.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

29) An individual who is eligible to be claimed as a dependent on another’s return and has $1,000 of earned income may claim a standard deduction of $1,350.

 

Answer:  TRUE

Explanation:  The dependent may claim a standard deduction for the greater of (1) $1,100 or (2) $350 plus her $1,000 earned income = $1,350.

Difficulty: 2 Medium

Topic:  The Standard Deduction

Learning Objective:  06-03 Determine the standard deduction available to individuals.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

 

 

30) Generally, service businesses are considered qualified trade or businesses for purposes of the deduction for qualified business income.

 

Answer:  FALSE

Explanation:  Service businesses are generally excluded from the definition of qualified trade or businesses for purposes of the deduction.

Difficulty: 2 Medium

Topic:  Deduction for qualified business income

Learning Objective:  06-04 Calculate the deduction for qualified business income.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

31) Congress allows self-employed taxpayers to deduct the cost of health insurance above the line (for AGI) because:

1. A) employers are allowed to deduct Social Security (FICA) taxes as a business expense.
2. B) self-employed taxpayers need an alternate mechanism for reducing the cost of health care.
3. C) this deduction provides a measure of equity between employees and the self-employed.
4. D) health insurance premiums cannot be deducted otherwise.
5. E) None of the choices are correct.

 

Answer:  C

Explanation:  Employers are allowed to deduct the premium as a compensation expense and employees are allowed to exclude from taxable income the value of the premiums paid on their behalf.

Difficulty: 2 Medium

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

 

 

32) Which of the following is a true statement?

1. A) Congress allows self-employed taxpayers to deduct the employer portion of their self-employment tax.
2. B) To deduct expenses associated with any profit-motivated activity, taxpayers must maintain a high level of involvement or effort in the activity throughout the year.
3. C) Business activities never require a relatively high level of involvement or effort from the taxpayer.
4. D) All business expenses are deducted for AGI.
5. E) All of these choices are correct.

 

Answer:  A

Explanation:  See discussion of the self-employment deduction in the text.

Difficulty: 3 Hard

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Analyze

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking

 

33) Which of the following is a true statement?

1. A) Unreimbursed employee business expenses are not deductible.
2. B) Investment advisory expenses are not deductible.
3. C) Business deductions are one of the most common deductions for AGI, but they are not readily visible on Schedule 1 of Form 1040.
4. D) The distinction between business and investment expenses is critical for determining whether a deduction is claimed above the line (for AGI) or below the line (itemized).
5. E) All of these choices are correct.

 

Answer:  E

Difficulty: 2 Medium

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

 

 

34) Which of the following is a true statement?

1. A) Employee business expenses are deducted for AGI.
2. B) Investment expenses are typically deducted for AGI.
3. C) Tax preparation fees are deducted for AGI.
4. D) Rental and royalty expenses are deducted for AGI.
5. E) All of these choices are correct.

 

Answer:  D

Explanation:  Investment expenses are typically deducted from AGI.

Difficulty: 1 Easy

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

35) Which of the following is a true statement?

1. A) Individuals qualify for the moving expense deduction only if they change employers.
2. B) Individuals qualify for the moving expense deduction if their employer does not pay for the moving expenses.
3. C) Moving expenses are deductible from AGI.
4. D) Moving expenses are generally not deductible.

 

Answer:  D

Explanation:  Moving expenses are not deductible except for members of the Armed Forces.

Difficulty: 2 Medium

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

 

 

36) Which of the following is a true statement?

1. A) The deduction for interest on educational loans is subject to a phase-out limitation.
2. B) The deduction for moving expenses is subject to a phase-out limitation.
3. C) Self-employed taxpayers are allowed to deduct health care premiums even if the taxpayer is eligible to participate in an employer-provided health plan.
4. D) Excess business losses are deductible up to $100,000.
5. E) All of these choices are false.

 

Answer:  A

Explanation:  Self-employed taxpayers are not allowed to deduct health care premiums if they are eligible to participate in an employer-provided health plan.

Difficulty: 2 Medium

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

37) Which of the following is a true statement?

1. A) For purposes of the deduction for educational interest, an educational loan must be used to pay tuition to any type of school.
2. B) The maximum deduction for educational interest is $5,000 for married taxpayers filing jointly.
3. C) Self-employed taxpayers are not allowed to deduct health care premiums if the taxpayer is eligible to participate in their spouse’s employer-provided health plan.
4. D) Self-employment taxes paid by self-employed taxpayers are deductible as business expenses.
5. E) All of these choices are correct.

 

Answer:  C

Explanation:  Simply being eligible to participate in a spouse’s employer-provided health plan precludes the deduction for health care premiums for self-employed taxpayers.

Difficulty: 2 Medium

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

 

 

38) Which of the following is a true statement?

1. A) For purposes of the deduction for educational interest, expenses do not include expenses for room, board, and travel.
2. B) For purposes of the deduction for educational interest, qualified education expenses are those paid for the education of the taxpayer, the taxpayer’s spouse, or the taxpayer’s dependent.
3. C) The maximum deduction for interest expense on qualified education loans is $6,000.
4. D) A penalty paid for prematurely withdrawing a certificate of deposit or similar deposit is deductible from AGI as an investment expense.
5. E) All of these choices are false.

 

Answer:  B

Explanation:  Penalties for early withdrawal are deductible for AGI.

Difficulty: 2 Medium

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

39) This year, Jong paid $3,000 of interest on a qualified education loan. Jong files married filing jointly and reports modified AGI of $152,000. What is Jong’s deduction for interest expense on an educational loan?

500. A) $2,500.
501. B) $3,000.
502. C) $1,500.
503. D) $1,000.
504. E) None of the choices are correct.

 

Answer:  C

Explanation:  2019 phase-out percentage = [$152,000 – $140,000] ÷ $30,000 = 40%; maximum = $2,500 × (1 − 40%) = $1,500.

Difficulty: 3 Hard

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

 

 

40) Mason paid $4,100 of interest on a loan that paid tuition for him to attend a private university this year. How much of this payment can Mason deduct as interest expense on an educational loan if he files single and reports modified AGI of $90,000?

100. A) $4,100.
101. B) $4,000.
102. C) $2,667.
103. D) $2,000.
104. E) None of the choices are correct.

 

Answer:  E

Explanation:  The deduction is eliminated for single taxpayers with modified AGI over $85,000 (2019).

Difficulty: 2 Medium

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

41) This year Riley files single and reports modified AGI of $76,000. Riley paid $1,200 of interest on a qualified education loan. What amounts can Riley deduct for qualifying education interest?

200. A) The deduction for qualifying education interest is $1,200.
201. B) The deduction for qualifying education interest is $1,000.
202. C) The deduction for qualifying education interest is $720.
203. D) The deduction for qualifying education interest is $200.
204. E) None of the choices are correct.

 

Answer:  C

Explanation:  Riley may deduct the amount paid ($1,200) up to $2,500, reduced by the phase-out amount. The phase-out amount is the amount paid up to $2,500 ($1,200 for Riley) multiplied by 40 percent [(76,000 – 70,000) ÷ 15,000 = 40%]. Hence, Riley may deduct $720 [$1,200 – ($1,200 × 40%) = $720].

Difficulty: 2 Medium

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

 

 

42) Max, a single taxpayer, has a $270,000 loss from his sole proprietorship. How much of this loss is deductible after considering the excess business loss rules?

1. A) $270,000.
2. B) $255,000.
3. C) $15,000.
4. D) $0.
5. E) None of the choices are correct.

 

Answer:  B

Explanation:  The nondeductible excess business loss is $15,000 (the taxpayer’s aggregate business deductions ($270,000) over the sum of his business gross income, $0 and $255,000).

Difficulty: 2 Medium

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

43) Max, a single taxpayer, has a $270,000 loss from his sole proprietorship. How much of this loss is not deductible after considering the excess business loss rules?

1. A) $270,000.
2. B) $255,000.
3. C) $15,000.
4. D) $0.
5. E) None of the choices are correct.

 

Answer:  C

Explanation:  The nondeductible excess business loss is $15,000 (the taxpayer’s aggregate business deductions ($270,000) over the sum of his business gross income, $0 and $255,000).

Difficulty: 2 Medium

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

 

 

44) Han is a self-employed carpenter and his wife, Christine, works full time as a grade school teacher. Han paid $525 for carpentry tools and supplies, and Christine paid $3,600 as her share of health insurance premiums (not with pretax dollars) for Han and herself in a qualified plan provided by the school district (not through an exchange). Which of the following is a true statement?

1. A) The tools and supplies are deductible for AGI while the health insurance is an itemized deduction.
2. B) Both expenditures are deductible for AGI.
3. C) The tools and supplies are an itemized deduction but the health insurance is deductible for AGI.
4. D) Both expenditures are itemized deductions.
5. E) Neither of the expenditures is deductible.

 

Answer:  A

Explanation:  Business expenses for self-employed individuals are Schedule C deductions but health insurance premiums are itemized deductions if the taxpayers are eligible to participate in an employer-provided health plan.

Difficulty: 2 Medium

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

 

 

45) Bruce is employed as an executive and his wife, Marie, is a self-employed realtor. Besides Bruce’s salary, Bruce and Marie own a warehouse that they rent to a local business for storage. This year they paid $1,250 for electric service in the warehouse. Marie also paid self-employment tax of $6,200 and Bruce had $7,000 of Social Security taxes withheld from his pay. Marie paid a $45 fee to rent a safe-deposit box to store records associated with her realty operation. Which of the following is a true statement?

1. A) One-half of the Social Security tax is deductible for AGI.
2. B) Only the electric bill is deductible for AGI.
3. C) The self-employment tax is not deductible.
4. D) The safe-deposit fee and the electric bill are deductible for AGI.
5. E) None of the choices are correct.

 

Answer:  D

Explanation:  The safe-deposit fee is a business expense and the electric bill is a rental expense. The employer portion of the self-employment taxes is deductible for AGI.

Difficulty: 2 Medium

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

46) Brice is a single, self-employed electrician who earns $60,000 per year in self-employment income. Brice paid the following expenses this year. Which of the expenses are deductible for AGI?

 

1. The cost of health insurance (not purchased through an exchange)
2. The employer portion of self-employment tax paid
3. Penalty on early withdrawal of funds from a certificate of deposit

 

1. A) Numbers 1 and 2 only.
2. B) Numbers 1 and 3 only.
3. C) Numbers 2 and 3 only.
4. D) None of the choices is deductible for AGI.
5. E) All of these choices are deductible for AGI.

 

Answer:  E

Explanation:  All of these expenditures are deductible for AGI.

Difficulty: 1 Easy

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

47) Hector is a married, self-employed taxpayer, and this year he paid $3,000 for his health insurance premiums (not through an exchange). Under which of the following alternative conditions can Hector deduct the cost of the premiums for AGI?

1. A) Hector chose not to participate in the employer-sponsored plan of his spouse.
2. B) Hector’s spouse participates in an employer-sponsored plan but Hector is not eligible to participate in this plan.
3. C) Neither Hector nor his spouse participates in an employer-sponsored plan although both are eligible to participate in a plan.
4. D) Hector can deduct the health insurance premiums regardless of the insurance status of his spouse.
5. E) None of the choices – health insurance premiums can only be deducted as an itemized deduction.

 

Answer:  B

Explanation:  Health insurance premiums for the self-employed are deductible for AGI if the taxpayer is not eligible to participate in an employer-provided plan.

Difficulty: 2 Medium

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

48) Lewis is an unmarried law student at State University, a qualified educational institution. Last year Lewis borrowed $30,000 and used the proceeds to pay his university tuition. This year Lewis paid $1,500 of interest on the loan. Which of the following is a true statement if Lewis reports $40,000 of salary and no other items of income or expense?

1. A) Lewis can deduct all the interest on his student loan for AGI.
2. B) Lewis can deduct all the interest on his student loan as an itemized deduction.
3. C) Lewis can only deduct $1,000 of the interest on his student loan for AGI.
4. D) Lewis can only deduct $1,000 of the interest on his student loan as an itemized deduction.
5. E) All of these choices are false.

 

Answer:  A

Explanation:  Up to $2,500 of interest on student loans is deductible for AGI. The interest deduction is phased out for single taxpayers with AGI exceeding $70,000.

Difficulty: 1 Easy

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

49) This fall Millie finally repaid her student loan. She originally borrowed the money to pay tuition several years ago, when she attended State University (a qualified educational institution). This year Millie paid a total of $2,400 of interest on the loan. If Millie files single and reports $75,000 of income and no other items of income or expense, how much of the interest can she deduct?

1. A) Millie can deduct $2,400 for AGI.
2. B) Millie can deduct $1,600 for AGI.
3. C) Millie can deduct $2,400 as an itemized deduction.
4. D) Millie can deduct $800 for AGI.
5. E) None—the tuition is not deductible.

 

Answer:  B

Explanation:  Millie may deduct the amount of interest paid ($2,400) reduced by the phase-out amount ($2,400 × [($75,000 – $70,000) ÷ $15,000] = $800). Thus, Millie may deduct $1,600 ($2,400 − $800 = $1,600).

Difficulty: 3 Hard

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

 

 

50) Ned is a head of household with a dependent son, Todd, who is a full-time student. This year Ned made the following expenditures related to Todd’s support:

 

Auto insurance premiums	$1,700
Room and board at Todd’s school	2,200
Health insurance premiums (not through an exchange)	600
Travel (to and from school)	350

 

 

What amount can Ned include in his itemized deductions?

1. A) $1,700 included in Ned’s miscellaneous itemized deductions.
2. B) $2,050 included in Ned’s miscellaneous itemized deductions.
3. C) $950 included in Ned’s miscellaneous itemized deductions.
4. D) $600 included in Ned’s medical expenses.
5. E) None of the choices are correct.

 

Answer:  D

Explanation:  The premiums paid for health and medical insurance for dependents are included in the taxpayer’s medical expenses when determining itemized deductions.

Difficulty: 2 Medium

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

 

 

51) Which of the following is a true statement?

1. A) A taxpayer can deduct medical expenses incurred for members of his family who are dependents.
2. B) A taxpayer can deduct medical expenses incurred for a qualified relative even if the relative does not meet the gross income test.
3. C) A divorced taxpayer can deduct medical expenses incurred for a child even if the child is claimed as a dependent by the former spouse.
4. D) Deductible medical expenses include long-term care services for disabled spouses and dependents.
5. E) All of these choices are true.

 

Answer:  E

Difficulty: 2 Medium

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

52) Which of the following costs are deductible as an itemized medical expense?

1. A) The cost of prescription medicine and over-the-counter drugs.
2. B) Medical expenses incurred to prevent disease.
3. C) The cost of elective cosmetic surgery.
4. D) Medical expenses reimbursed by health insurance.
5. E) None of these costs are deductible.

 

Answer:  B

Explanation:  Medical expenses include any payments that health care does not reimburse for the care, prevention, diagnosis, or cure of injury, disease, or bodily function.

Difficulty: 1 Easy

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

 

 

53) Which of the following costs is NOT deductible as an itemized medical expense?

1. A) The cost of eyeglasses.
2. B) Payments to a hospital.
3. C) Transportation for medical purposes.
4. D) The cost of insurance for long-term care services.
5. E) All of these choices are deductible as medical expenses.

 

Answer:  E

Difficulty: 1 Easy

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

54) Opal fell on the ice and injured her hip this winter. As a result she paid $3,000 for a visit to the hospital emergency room and $750 for follow-up visits with her doctor. While she recuperated, Opal paid $500 for prescription medicine and $600 to a therapist for rehabilitation. Insurance reimbursed Opal $1,200 for these expenses. What is the amount of Opal’s qualifying medical expense?

1. A) $3,000.
2. B) $3,750.
3. C) $3,650.
4. D) $4,850.
5. E) All of these choices are correct.

 

Answer:  C

Explanation:  The qualifying expenses are calculated as follows:

Emergency room and doctor visits	$	3,750
Prescription medication		500
Physical therapy		600
Total qualifying medical expenses	$	4,850
Less insurance reimbursement		(1,200	)
Qualifying medical expenses from the accident	$	3,650

 

 

Difficulty: 1 Easy

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Remember; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

55) Which of the following taxes will not qualify as an itemized deduction?

1. A) Personal property taxes assessed on the value of specific property.
2. B) State, local, and foreign income taxes.
3. C) Real estate taxes on a residence.
4. D) Gasoline taxes on personal travel.
5. E) None of the choices qualify as itemized deductions.

 

Answer:  D

Explanation:  Gasoline taxes on personal travel are not deductible.

Difficulty: 1 Easy

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Remember; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

56) This year Amanda paid $749 in federal gift taxes on a gratuitous transfer to her nephew. Amanda lives in Texas and does not pay any state or local income taxes. Which of the following is a true statement?

1. A) Amanda cannot deduct federal gift taxes.
2. B) Amanda can deduct federal gift taxes for AGI.
3. C) Amanda can deduct federal gift taxes paid as an itemized deduction.
4. D) Amanda must include federal gift taxes with other miscellaneous itemized deductions.
5. E) None of the choices are true.

 

Answer:  A

Explanation:  Federal gift and estate taxes are not deductible.

Difficulty: 2 Medium

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

 

 

57) This year Norma, a single taxpayer, paid $11,200 of real estate taxes on her personal residence and $9,500 of state income taxes. Which of the following is true?

1. A) Norma can deduct $11,200 of real estate taxes as an itemized deduction.
2. B) Norma can deduct $9,500 of state income taxes as a for AGI deduction.
3. C) Norma can deduct $10,000 of taxes as an itemized deduction.
4. D) Even if Norma has no other itemized deductions, she should claim the standard deduction.
5. E) None of the choices are correct.

 

Answer:  C

Explanation:  The itemized deduction for taxes is limited to $10,000 for single taxpayers.

Difficulty: 1 Easy

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Remember; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

58) Madeoff donated stock (capital gain property) to a public charity. He purchased the stock three years ago for $100,000, and on the date of the gift, it had a fair market value of $200,000. What is his maximum charitable contribution deduction for the year related to this stock if his AGI is $500,000?

1. A) $100,000.
2. B) $200,000.
3. C) $150,000.
4. D) $250,000.
5. E) None of the choices are correct.

 

Answer:  C

Explanation:  The stock is appreciated capital gain property limited to 30 percent of AGI.

Difficulty: 2 Medium

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

 

 

59) Carly donated inventory (ordinary income property) to a church. She purchased the inventory last month for $100,000, and on the date of the gift, it had a fair market value of $92,000. What is her maximum charitable contribution deduction for the year related to this inventory if her AGI is $200,000?

1. A) $100,000.
2. B) $92,000.
3. C) $60,000.
4. D) $46,000 if the church sells the inventory.
5. E) None of the choices are correct.

 

Answer:  B

Explanation:  The charitable deduction for ordinary income property is the lesser of FMV or basis, limited to 50 percent of AGI.

Difficulty: 2 Medium

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

60) Simone donated a landscape painting (tangible capital gain property) to a library, a public charity. She purchased the painting five years ago for $50,000, and on the date of the gift, it had a fair market value of $200,000. What is her maximum charitable contribution deduction for the year if her AGI is $300,000?

1. A) $100,000.
2. B) $200,000.
3. C) $90,000 if the library uses the painting in its charitable purpose.
4. D) $150,000.
5. E) None of the choices are correct.

 

Answer:  C

Explanation:  The painting is appreciated capital gain property given to a public charity. However, because it is also tangible personal property, the donation is FMV only if it is related to the charitable use or purpose. If so, the deduction is limited to 30 percent of AGI. If not, the deduction is basis limited to 50 percent of AGI.

Difficulty: 3 Hard

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

 

 

61) Larry recorded the following donations this year:

 

 

$500 cash to a family in need

$2,400 to a church

$500 cash to a political campaign

To the Salvation Army household items that originally cost $1,200 but are worth $300.

 

 

What is Larry’s maximum allowable charitable contribution if his AGI is $60,000?

900. A) $2,900.
901. B) $1,000.
902. C) $2,700.
903. D) $4,600.
904. E) None of the choices are correct.

 

Answer:  C

Explanation:  $2,400 to church + $300 FMV of household items.

Difficulty: 1 Easy

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Remember; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

 

 

62) Which of the following is a true statement?

1. A) The deduction of cash contributions to public charities is limited to 30 percent of AGI.
2. B) The deduction of capital gain property to private nonoperating foundations is limited to 50 percent of AGI.
3. C) The deduction of capital gain property to public charities is limited to 20 percent of AGI.
4. D) The deduction of cash contributions to private nonoperating foundations is limited to 30 percent of AGI.
5. E) None of the choices are true.

 

Answer:  D

Explanation:  The deduction of cash contributions to public charities is limited to 60 percent of AGI, the deduction of capital gain property to private nonoperating foundations is limited to 20 percent of AGI, and the deduction of capital gain property to public charities is limited to 30 percent of AGI.

Difficulty: 3 Hard

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking

 

63) When taxpayers donate cash and capital gain property to a public charity, the AGI percentage limitation is applied in the following order:

1. A) a 30 percent of AGI limitation is applied to the aggregate donation.
2. B) a 60 percent of AGI limitation is applied to the cash donation and a 20 percent of AGI limitation is applied to the fair market value of the capital gain donation.
3. C) a 30 percent of AGI limitation is applied to the cash donation and a 20 percent of AGI limitation is applied to the fair market value of the capital gain donation.
4. D) a 60 percent of AGI limitation is applied to the cash donation and the fair market value of the capital gain donation is subject to the lesser of a 30 percent of AGI limitation or a 50 percent of AGI limitation after subtracting the cash contributions.
5. E) donations to public charities are not subject to AGI limitations.

 

Answer:  D

Explanation:  Capital gain property is subject to lower AGI limits, but the aggregate donation cannot exceed 50 percent of AGI.

Difficulty: 2 Medium

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

AICPA:  BB Critical Thinking

 

 

 

64) Which of the following is a true statement?

1. A) Taxpayers may only deduct interest on up to $1,500,000 of acquisition indebtedness.
2. B) Taxpayers may deduct interest on up to $1,000,000 of home-equity debt.
3. C) The deduction for investment interest expense is not subject to limitation.
4. D) A taxpayer who incurs acquisition indebtedness in 2018 may only deduct interest on up to $750,000 of acquisition indebtedness.
5. E) None of the choices are correct.

 

Answer:  D

Explanation:  The $750,000 limit applies to acquisition indebtedness incurred after December 15, 2017.

Difficulty: 2 Medium

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

65) Margaret Lindley paid $15,000 of interest on her $300,000 acquisition debt for her home (fair market value of $500,000), $4,000 of interest on her $30,000 home-equity loan, $1,000 of credit card interest, and $3,000 of margin interest for the purchase of stock. Assume that Margaret Lindley has $10,000 of interest income this year and no investment expenses. How much of the interest expense may she deduct this year?

1. A) $23,000.
2. B) $22,000.
3. C) $19,000.
4. D) $18,000.
5. E) None of the choices are correct.

 

Answer:  D

Explanation:  The credit card interest is nondeductible personal interest and the home-equity interest is not deductible. The remaining interest is deductible as qualified residence interest ($15,000) and investment interest ($3,000). The $3,000 investment interest is not restricted by her net investment income ($10,000).

Difficulty: 2 Medium

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

 

 

66) Which of the following is a true statement?

1. A) A casualty loss on personal-use assets is generally not deductible.
2. B) A casualty loss on investment property is generally not deductible.
3. C) All casualty losses are deductible.
4. D) A casualty loss on a personal-use asset is deductible for AGI.
5. E) None of the choices are correct.

 

Answer:  A

Explanation:  Casualty losses on personal-use assets are generally nondeductible.

Difficulty: 1 Easy

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

67) Glenn is an accountant who races stock cars as a hobby. This year Glenn was paid a salary of $80,000 from his employer and won $2,000 in various races. What is the effect of the racing activities on Glenn’s taxable income if Glenn has also incurred $4,200 of hobby expenses this year? Assume that Glenn itemizes his deductions but has no other miscellaneous itemized deductions.

1. A) increase in taxable income of $2,000.
2. B) increase in taxable income of $1,640.
3. C) no change in taxable income.
4. D) decrease in taxable income of $560.
5. E) decrease in taxable income of $2,200.

 

Answer:  A

Explanation:  Hobby expenses are not deductible, whereas hobby revenue is included in gross income.

Difficulty: 3 Hard

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

 

 

68) Which of the following is a deductible miscellaneous itemized deduction?

1. A) gambling losses to the extent of gambling winnings.
2. B) fees for investment advice.
3. C) employee business expenses.
4. D) tax preparation fees.
5. E) All of these choices are correct.

 

Answer:  A

Explanation:  Employee business expenses, tax preparation fees, investment expenses, and hobby expenses are not deductible.

Difficulty: 1 Easy

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

69) Frieda is 67 years old and deaf. If Frieda files as a head of household, what amount of standard deduction can she claim in 2019?

200. A) $12,200.
201. B) $13,850.
202. C) $18,350.
203. D) $19,650.
204. E) $20,000.

 

Answer:  E

Explanation:  $20,000 = $18,350 + $1,650. The regular standard deduction is increased if the taxpayer is age 65 or older or blind.

Difficulty: 2 Medium

Topic:  The Standard Deduction

Learning Objective:  06-03 Determine the standard deduction available to individuals.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

 

 

70) Andres and Lakeisha are married and file jointly. Andres is 72 years old and in good health. Lakeisha is 62 years old and blind. What amount of standard deduction can Andres and Lakeisha claim in 2019?

1. A) $27,000.
2. B) $27,700.
3. C) $25,850.
4. D) $25,700.
5. E) None of the choices are correct.

 

Answer:  A

Explanation:  $27,000 = $24,400 + ($1,300 × 2). The married filing jointly standard deduction is increased $1,300 for each blind taxpayer and/or each taxpayer at or over age 65 by year-end.

Difficulty: 3 Hard

Topic:  The Standard Deduction

Learning Objective:  06-03 Determine the standard deduction available to individuals.

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

71) Which of the following is a true statement?

1. A) The standard deduction is increased for taxpayers who are blind or deaf at year-end.
2. B) A married couple is only entitled to one addition to their standard deduction even if both spouses are both over age 65.
3. C) Bunching itemized deductions is a legal method of tax avoidance.
4. D) The standard deduction is subject to a phase-out based on AGI.
5. E) All of these choices are true.

 

Answer:  C

Explanation:  Bunching is perfectly legal.

Difficulty: 1 Easy

Topic:  The Standard Deduction

Learning Objective:  06-03 Determine the standard deduction available to individuals.

Bloom’s:  Remember

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

 

 

72) Campbell, a single taxpayer, has $95,000 of profits from her general store, which she operates as a sole proprietorship. She has no employees, $40,000 of qualified property, and $50,000 of taxable income before the deduction for qualified business income. How much is Campbell’s deduction for qualified business income?

1. A) $95,000.
2. B) $19,000.
3. C) $10,000.
4. D) $8,000.
5. E) $0.

 

Answer:  C

Explanation:  Her deduction for qualified business income is limited to 20 percent of her taxable income before the deduction. She is not subject to the wage limit because her income falls below the $160,700 threshold.

Difficulty: 2 Medium

Topic:  Deduction for qualified business income

Learning Objective:  06-04 Calculate the deduction for qualified business income.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

73) Campbell, a single taxpayer, has $400,000 of profits from her general store, which she operates as a sole proprietorship. She has no employees, $40,000 of qualified property, and $500,000 of taxable income before the deduction for qualified business income. How much is Campbell’s deduction for qualified business income?

1. A) $100,000.
2. B) $80,000.
3. C) $20,000.
4. D) $1,000.
5. E) $0.

 

Answer:  D

Explanation:  Her deduction for qualified business income is limited to 25 percent of her wages ($0) plus 2.5 percent of her qualified property (2.5% × $40,000 = $1,000).

Difficulty: 2 Medium

Topic:  Deduction for qualified business income

Learning Objective:  06-04 Calculate the deduction for qualified business income.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

 

 

74) Campbell, a single taxpayer, has $400,000 of profits from her general store, which she operates as a sole proprietorship. She has $100,000 of employee wages, $40,000 of qualified property, and $500,000 of taxable income before the deduction for qualified business income. How much is Campbell’s deduction for qualified business income?

1. A) $100,000.
2. B) $80,000.
3. C) $50,000.
4. D) $26,000.
5. E) $0.

 

Answer:  C

Explanation:  Her deduction for qualified business income is limited to 50 percent of her wages ($100,000 × 50% = $50,000).

Difficulty: 2 Medium

Topic:  Deduction for qualified business income

Learning Objective:  06-04 Calculate the deduction for qualified business income.

Bloom’s:  Understand

AACSB:  Reflective Thinking

AICPA:  BB Critical Thinking

 

 

 

75) Scott is a self-employed plumber and his wife, Emily, is a full-time employee for a university. Emily has health insurance from a qualified plan provided by the university, but Scott has chosen to purchase his own health insurance rather than participate in Emily’s plan. Besides paying $5,400 for his health insurance premiums, Scott also pays the following expenses associated with his plumbing business:

 

Plumbing tools and supplies	$1,300
Rent on Scott’s plumbing shop	6,250
Transportation between Scott’s shop and various jobsites	500
Plumber’s uniform	50
Plumbing truck rental	7,200
Self-employment tax (half is employer share)	400

 

 

What is the amount of deductions for AGI that Scott can claim this year (2019)?

 

Answer:  $15,500.

 

$15,500 = $1,300 + $6,250 + $500 + $50 + $7,200 + ($400 × 0.50). All of the expenses are deductible for AGI except for Scott’s health insurance and 50 percent of the self-employment tax.

Difficulty: 1 Easy

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Remember; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

 

 

76) Alexandra operates a garage as a sole proprietorship. Alexandra also owns a half interest in a partnership that operates a gas station. This year Alexandra paid or reported the following expenses related to her garage and other property. Determine Alexandra’s AGI for 2019.

 

Revenue from auto repairs	$143,930
Salaries paid to mechanics	72,210
Supplies and tools	18,500
Revenues from gas station partnership (Alexandra’s share)	125,000
Expenses from gas station partnership (Alexandra’s share)	95,200
Self-employment tax (half is employer’s share)	12,702

 

 

Answer:  $76,669

 

All of the expenses are deductible, but only 50 percent of the self-employment tax is deductible ($6,351).

Difficulty: 1 Easy

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Remember; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

77) Tita, a married taxpayer filing jointly, has a $700,000 business loss from her S corporation. Assume the $700,000 loss satisfies the basis, at-risk, and passive loss rules. Assume also that neither she nor her husband has any other business losses or business income. How much of the $700,000 loss may she deduct this year?

 

Answer:  $510,000.

 

She has a nondeductible excess business loss of $190,000, defined as her $700,000 over the sum of her other business income, $0 and $510,000.

Difficulty: 1 Easy

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Remember; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

 

 

78) Last year Henry borrowed $15,000 to help pay for his dependent daughter’s college tuition. This year Henry paid $2,800 of interest on the loan. How much, if any, interest can Henry deduct if he files single with AGI of $77,500?

 

Answer:  $1,250.

 

The deduction for student loan interest is reduced for single taxpayers with AGI above $70,000 but below $85,000. The deduction is the amount paid up to $2,500, reduced by the phase-out percentage. The percentage is equal to $77,500 less $70,000, divided by $15,000. In this problem, there is a phase-out of 50 percent ($7,500 / $15,000), thereby reducing the amount paid up to $2,500 (in this case, $2,500) to a deduction of $1,250 [$2,500 – ($2,500 × ($7,500 / $15,000)) = $1,250].

Difficulty: 2 Medium

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

 

 

79) Kaylee is a self-employed investment counselor who also owns a rental property. This year, she collected $85,000 in fees and paid the following expenses:

 

Health insurance premiums (not through an exchange)	$	4,200
Life insurance premiums (whole life)		1,900
Books on investing		200
Repairs of the rental property		450
Advertising for investment clients		1,770
State income taxes		4,300
Self-employment tax (half is employer share)		11,732

 

 

Kaylee files single. Calculate her adjusted gross income.

 

Answer:  $72,514 = $85,000 − $12,486.

 

The books on investing, advertising for investment clients, repairs for the rental property, 50 percent of the self-employment taxes, and health insurance premiums are deductible for AGI. The whole life insurance premiums are not deductible, and the state income taxes are only deductible from AGI.

Difficulty: 2 Medium

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

 

 

80) This year Tiffanie files as a single taxpayer. Tiffanie received $67,700 of salary and paid $3,200 of qualified educational interest. This year Tiffanie paid moving expenses of $5,000 and received $9,800 of alimony (from her ex-husband, whom she divorced in 2012). What is Tiffanie’s AGI?

 

Answer:  $76,250 ($67,700 + $9,800 − $1,250 = $76,250).

 

The alimony and salary are income, the moving expense is not deductible, and part of the educational interest is deductible for AGI. Tiffanie’s maximum educational interest deduction (amount paid up to $2,500) is limited to $1,250. The deduction for educational interest ($2,500) is subject to phase-out because Tiffanie’s modified AGI exceeds $70,000. The phase-out is calculated by subtracting $70,000 from Tiffanie’s modified AGI ($67,700 + $9,800 = $77,500) and dividing by $15,000 as follows: $2,500 × [($77,500 − $70,000) ÷ $15,000] = $1,250. Thus, the amount deductible is $1,250 [$2,500 − $1,250 = $1,250].

Difficulty: 3 Hard

Topic:  Deductions for AGI

Learning Objective:  06-01 Identify the common deductions necessary for calculating adjusted gross income (AGI).

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

 

 

81) Detmer is a successful doctor who earned $204,800 in fees this year, but he also competes in weekend golf tournaments. Detmer reported the following expenses associated with competing in almost a dozen tournaments:

 

Transportation to various tournaments	$3,450
Lodging	1,890
Entry fees	920
Golf supplies (balls, tees, etc.)	75

 

 

This year Detmer won $5,200 from competing in various golf tournaments. Assuming that Detmer itemizes his deductions and that he did not have any other miscellaneous itemized deductions, what amount of the golfing expenses are deductible after considering all limitations if the tournament golfing is treated as a hobby activity?

 

Answer:  $0

 

Hobby expenses are not deductible.

Difficulty: 2 Medium

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

 

 

82) Jenna (age 50) files single and reports AGI of $40,000. This year she has incurred the following medical expenses:

 

Dentist charges	$	90
Physicians’ fees		2,800
Cosmetic surgery		400
Cost of eyeglasses		250
Hospital charges		1,330
Prescription drugs		240
Over-the-counter drugs		75
Medical insurance premiums (not through an exchange)		1,200

 

 

Calculate the amount of medical expenses that will be included with Jenna’s other itemized deductions.

 

Answer:  $1,910.

 

All expenses are qualified medical expenses except for the cosmetic surgery and over-the-counter drugs. Hence, the medical expense deduction is $5,910 less $4,000 (10 percent × 40,000) = $1,910, and this amount is included with other itemized deductions.

Difficulty: 2 Medium

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

 

 

83) Chuck has AGI of $70,000 and has made the following payments:

 

State income tax withholding	$1,900
State income tax estimated payments	850
Federal income tax withholding	7,100
Social Security tax withheld from wages	4,800
State excise tax on liquor	400
State inheritance tax	1,200
County real estate tax	790
School district tax on realty	510

 

 

Calculate the amount of taxes that Chuck can include with his itemized deductions.

 

Answer:  $4,050 = $1,900 + $850 + $790 + $510.

 

The deductible taxes include county real estate and school district tax on real estate. State income taxes paid and withheld are also deductible.

Difficulty: 1 Easy

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Remember; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

84) This year, Benjamin Hassell paid $20,000 of interest on a mortgage on his home (Benjamin borrowed $600,000 in 2015 to buy the residence and it is currently worth $1,000,000), $12,000 on a $150,000 home-equity loan on his home, and $10,000 of interest on a mortgage on his vacation home (loan of $300,000; home purchased for $400,000 in 2016; home is not rented out at any time). How much interest expense can Benjamin deduct as an itemized deduction?

 

Answer:  $30,000.

 

Benjamin’s acquisition debt incurred before December 16, 2017, on his home and vacation home does not exceed $1,000,000. Thus, he can deduct the $20,000 mortgage interest on his home and the $10,000 of mortgage interest on his vacation home. The home-equity interest is not deductible.

Difficulty: 2 Medium

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

85) This year Darcy made the following charitable contributions:

 

 

Donee	Property	Cost	FMV
State University	IBM stock	$15,000	$10,500
Salvation Army	Clothes	2,500	500
State Art Museum	Painting	5,000	45,000
City Hospital	Cash	8,000

 

 

Determine the maximum amount of charitable deduction for Darcy’s contribution of the painting if her AGI is $80,000 this year. You may assume that both the stock and painting have been owned for 10 years and that the painting was used by the State Art Museum in a manner consistent with the museum’s charitable purpose.

 

 

 

Answer:  The charitable deduction is $21,000 for the painting and $40,000 overall.

 

 

	Description	Amount		Explanation
(1)	AGI	$	80,000
(2)	60 percent contributions		8,000		Cash contribution
(3)	60 percent AGI contribution limit		48,000		(1) × 60%
(4)	Allowable 60 percent deductions		8,000		Lesser of (2) or (3)
(5)	50 percent contributions		11,000		IBM stock and clothes
(6)	50 percent AGI contribution limit		32,000		[(1) × 50%] − (4)
(7)	Allowable 50 percent deductions		11,000		Least of (5) or (6)
(8)	30 percent contributions		45,000		Painting
(9)	30 percent AGI contribution limit		24,000		(1) × 30%
(10)	Remaining 50 percent AGI contribution limit		21,000		(6) − (7)
(11)	Allowable 30 percent deductions		21,000		Least of (8), (9), or (10)
	Deductible charitable contributions	$	40,000		(4) + (7) + (11)

 

The stock and clothes are not subject to the 30 percent AGI limit because these are ordinary income properties (basis exceeds its value so neither is capital gain property). The painting is long-term tangible personal property apparently related to the purpose of the charity. The deduction this year is $40,000, consisting of cash of $8,000, IBM stock of $10,500, clothes of $500, and the painting of $21,000. The remaining value of the painting, $24,000 ($45,000 − $21,000), is carried over to next year, subject to the 30 percent of AGI limit.

Difficulty: 3 Hard

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

 

 

86) This year Latrell made the following charitable contributions:

 

 

Donee	Property	Cost	FMV
Jones Foundation	IBM stock	$15,000	$25,000
Salvation Army	Clothes	2,500	500
City Hospital	Cash	20,000

 

Determine the maximum amount of Latrell’s charitable deduction assuming the Jones Foundation is a private nonoperating foundation and Latrell’s AGI is $100,000 this year. You may assume that the stock and painting have been owned for 10 years.

 

 

 

Answer:  The charitable deduction is $40,500 overall.

 

 

	Description	Amount		Explanation
(1)	AGI	$	100,000
(2)	60 percent contributions		20,000	Cash contribution
(3)	60 percent AGI contribution limit		60,000	(1) × 60%
(4)	Allowable 60 percent deductions		20,000	Lesser of (2) or (3)
(5)	50 percent contributions		5,00	Clothes
(6)	50 percent AGI contribution limit		30,000	[(1) × 50%] − (4)
(7)	Allowable 50 percent deductions		5,00	Least of (5) or (6)
(8)	20 percent contributions		25,000	IBM stock
(9)	20 percent AGI contribution limit		20,000	(1) × 20%
(10)	Remaining 50 percent AGI contribution limit		29,500	(6) – (7)
(11)	Allowable 30 percent deductions		20,000	Least of (8), (9), or (10)
	Deductible charitable contributions	$	40,500	(4) + (7) + (11)

 

The clothes are not subject to the 30 percent AGI limit because they are ordinary income property (basis exceeds their value so they are not capital gain property). The IBM stock is long-term capital gain property, but because the donee is a private nonoperating foundation, the deduction for the value of the stock is subject to a 20 percent of AGI limitation. The deduction this year is $40,500, consisting of cash of $20,000, clothes of $500, and IBM stock of $20,000. The remaining value of the stock, $5,000 ($25,000 − $20,000), is carried over to next year, subject to the 20 percent of AGI limit.

Difficulty: 3 Hard

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

 

 

87) Claire donated 200 publicly traded shares of stock (held for five years) to her father’s nonoperating private foundation this year. The stock was worth $15,000 but Claire’s basis was only $4,000. Determine the maximum amount of charitable deduction for the donation if Claire’s AGI is $60,000 this year.

 

Answer:  $12,000

 

The stock is long-term capital gain property donated to a nonoperating private foundation, so the maximum donation is limited to 20 percent of AGI. The remaining deduction of $3,000 will carry over to next year.

Difficulty: 2 Medium

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

88) Erika (age 62) was hospitalized with injuries from an auto accident this year. She incurred the following expenses from the accident:

 

Hospital charges	$3,280
Prescription medicine	510
Doctors’ fees	1,240

 

 

In addition, Erika’s auto was completely destroyed in the accident. She bought the car several years ago for $18,000 and it was worth $4,700 at the time of the accident. What are Erika’s itemized deductions this year if she was uninsured and her AGI is $40,000?

 

Answer:  $1,030 of medical expenses.

 

The medical expenses of $5,030 are reduced by 10 percent of AGI ($4,000), and the casualty loss is not deductible.

Difficulty: 2 Medium

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

 

 

89) Karin and Chad (ages 30 and 31, respectively) are married and together have $110,000 of AGI. This year they have recorded the following expenses:

 

Home mortgage interest (acquisition debt of $300,000)	$16,640
Real estate taxes	5,400
State income taxes paid	6,300
Medical expenses (unreimbursed)	1,800
Employee business expenses (unreimbursed)	450
Charitable contributions (cash to their church)	760

 

 

Karin and Chad will file married jointly. Calculate their taxable income.

 

Answer:  $82,600 = $110,000 – ($16,640 mortgage interest + 10,000 taxes + $760 charitable contributions).

 

Karin and Chad will choose to itemize their deductions. The medical expenses will not generate any addition to the itemized deductions because they are subject to a 10 percent of AGI floor limit. The taxes are limited to $10,000, and the unreimbursed business expenses are not deductible.

Difficulty: 1 Easy

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Remember; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

 

 

90) Misti purchased a residence this year. Misti, age 32, is a single parent and lives with her 1-year-old daughter. This year, Misti received a salary of $160,000 and made the following payments:

 

Home mortgage interest ($500,000 acquisition debt)	$15,000
Real estate taxes	1,525
State income taxes paid	1,340
Income tax preparation fee	2,250
Charitable contributions (cash to their church)	120

 

 

Misti files as a head of household. Calculate her taxable income this year.

 

Answer:  $141,650 = $160,000 − $18,350.

 

Misti’s itemized deductions total $17,985 ($15,000 + $1,525 + $1,340 + $120). Thus, Misti will elect the standard deduction of $18,350. The income tax preparation fee is nondeductible.

Difficulty: 2 Medium

Topic:  The Standard Deduction

Learning Objective:  06-03 Determine the standard deduction available to individuals.

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

91) Jon and Holly are married and live in a retirement community. This year Jon celebrated his 65th birthday and Holly turned 68 years old. For their ages, both Jon and Holly are in good health. What is the amount of their standard deduction this year?

 

Answer:  $27,000.

 

The married filing jointly standard deduction is $24,400, increased by $2,600 because both taxpayers are age 65 by year-end ($1,300 each).

Difficulty: 1 Easy

Topic:  The Standard Deduction

Learning Objective:  06-03 Determine the standard deduction available to individuals.

Bloom’s:  Remember; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

 

 

92) This year Kelly bought a new auto for $20,000 plus $1,650 in state and local sales taxes. Besides this sales tax, Kelly also paid $8,260 in state income taxes and had mortgage interest of $5,500 ($400,000 acquisition indebtedness on her residence). If Kelly files single with AGI of $56,000, what amount of itemized deductions will she be eligible to claim?

 

Answer:  $13,760 = $8,260 + $5,500.

 

State income taxes, but not sales taxes, are included with other itemized deductions when determining total itemized deductions. A taxpayer could elect to deduct state sales taxes instead of state income taxes. Nonetheless, Kelly would not make this election because her state income taxes ($8,260) exceed her state sales taxes.

Difficulty: 1 Easy

Topic:  Deductions from AGI: Itemized Deductions

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.

Bloom’s:  Remember; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

 

 

93) Toshiomi works as a sales representative and travels extensively for his employer’s business. This year Toshiomi was paid $75,000 in salary and made the following expenditures:

 

State income taxes withheld	$6,300
Employee business expenses (unreimbursed portion)	1,450
Charitable cash contributions	200
Investment counseling fees	780
Tax preparation fee	310

 

 

Toshiomi also made a number of trips to Las Vegas for gambling. This year Toshiomi won $12,000 in a poker tournament, and this amount was almost enough to offset his other gambling losses ($13,420). Calculate Toshiomi’s 2019 taxable income if he files single.

 

Answer:  $68,500.

 

$68,500 = ($75,000 salary + $12,000 gambling winnings) – ($6,300 state taxes + $12,000 gambling losses + $200 charitable contributions). The employee expenses, investment fees, and tax preparation fee are nondeductible. The gambling losses (up to gambling winnings) are a miscellaneous itemized deduction, and the state income taxes and charitable contributions are also itemized deductions.

Difficulty: 3 Hard

Topic:  Deductions from AGI: Itemized Deductions; The Standard Deduction

Learning Objective:  06-02 Describe the different types of itemized deductions available to individuals.; 06-03 Determine the standard deduction available to individuals.

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

94) Cesare is 16 years old and works throughout the year at a local coffee shop. This year, he made $9,200 at the coffee shop and earned $2,000 in interest income from his savings account. Assume that Cesare is claimed as a dependent on his parents’ tax return. What is Cesare’s standard deduction for the year?

 

Answer:  $9,550.

 

Since Cesare is claimed as a dependent on another’s tax return, his standard deduction ($12,200) is limited to his earned income ($9,200) plus $350.

Difficulty: 3 Hard

Topic:  The Standard Deduction

Learning Objective:  06-03 Determine the standard deduction available to individuals.

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

95) Rachel is an accountant who practices as a sole proprietor. This year, Rachel had net business income of $270,000 from her practice. Assume that Rachel pays $50,000 wages to her employees, she has $20,000 of property (unadjusted basis of equipment she purchased last year), she has no capital gains, and her taxable income before the deduction for qualified business income is $225,000. Calculate Rachel’s deduction for qualified business income.

 

Answer:  $0.

 

Since Rachel has taxable income of $225,000 (before the deduction for qualified business income) and above $210,700, her accounting would be considered a specified service or trade business. Thus, she would not be eligible for the deduction for qualified business income.

Difficulty: 2 Medium

Topic:  Deduction for qualified business income

Learning Objective:  06-04 Calculate the deduction for qualified business income.

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

96) Rachel is an accountant who practices as a sole proprietor. This year, Rachel had net business income of $200,000 from her practice. Assume that Rachel pays $50,000 wages to her employees, she has $20,000 of property (unadjusted basis of equipment she purchased last year), she has no capital gains, and her taxable income before the deduction for qualified business income is $140,000. Calculate Rachel’s deduction for qualified business income.

 

Answer:  $28,000.

 

Since Rachel has taxable income of $140,000 (before the deduction for qualified business income) and below $160,700, her accounting would not be considered a specified service or trade business. Thus, she is eligible for the deduction for qualified business income. Because her taxable income is below $160,700, the wage limitation would not apply. Thus, her deduction is $28,000, the lesser of (a) $40,000 (20 percent of her qualified business income, 20% × $200,000) or (b) $28,000 (20 percent of her taxable income before the deduction, 20% × $140,000).

Difficulty: 2 Medium

Topic:  Deduction for qualified business income

Learning Objective:  06-04 Calculate the deduction for qualified business income.

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

 

 

97) Rachel is an engineer who practices as a sole proprietor. This year, Rachel had net business income of $400,000 from her business. Assume that Rachel pays $150,000 wages to her employees, she has $20,000 of property (unadjusted basis of equipment she purchased last year), she has no capital gains, and her taxable income before the deduction for qualified business income is $380,000. Calculate Rachel’s deduction for qualified business income.

 

Answer:  $75,000.

 

Engineering is a qualified trade or business. So, Rachel is eligible for the deduction for qualified business income. Rachel is limited by the wage-based limitation because her taxable income is above $160,700. Her deduction of 20 percent of her qualified business income ($400,000 × 20% = $80,000) is limited to the greater of (a) 50 percent of her wages paid ($150,000 × 50% = $75,000) or (b) 25 percent of her allocable wages ($150,000 × 25% = $37,500) plus 2.5 percent of the unadjusted basis of qualified property ($20,000 × 2.5% = $500). Thus, the wage limit reduces her potential deduction for qualified business income to $75,000. Rachel is not limited by the taxable income limitation because 20 percent of her qualified business income ($400,000 × 20% = $80,000, limited to $75,000 by the wage limit) is less than 20 percent of her taxable income before the deduction ($380,000 × 20% = $76,000). Thus, she may deduct $75,000 as a deduction for qualified business income.

Difficulty: 2 Medium

Topic:  Deduction for qualified business income

Learning Objective:  06-04 Calculate the deduction for qualified business income.

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking

 

 

 

98) Rachel is an engineer who practices as a sole proprietor. This year, Rachel had net business income of $500,000 from her business. Assume that Rachel pays $20,000 wages to her employees, she has $500,000 of property (unadjusted basis of equipment she purchased last year), she has no capital gains, and her taxable income before the deduction for qualified business income is $380,000. Calculate Rachel’s deduction for qualified business income.

 

Answer:  $17,500.

 

Engineering is a qualified trade or business. So, Rachel is eligible for the deduction for qualified business income. Rachel is limited by the wage-based limitation because her taxable income is above $160,700. Her deduction of 20 percent of her qualified business income ($500,000 × 20% = $100,000) is limited to the greater of (a) 50 percent of her wages paid ($20,000 × 50% = $10,000) or (b) 25 percent of her allocable wages ($20,000 × 25% = $5,000) plus 2.5 percent of the unadjusted basis of qualified property ($500,000 × 2.5% = $12,500). Thus, the wage limit reduces her potential deduction for qualified business income to $17,500. Rachel is not limited by the taxable income limitation because 20 percent of her qualified business income ($500,000 × 20% = $100,000, limited to $17,500 by the wage limit) is less than 20 percent of her taxable income before the deduction ($380,000 × 20% = $76,000). Thus, she may deduct $17,500 as a deduction for qualified business income.

Difficulty: 2 Medium

Topic:  Deduction for qualified business income

Learning Objective:  06-04 Calculate the deduction for qualified business income.

Bloom’s:  Understand; Analyze

AACSB:  Reflective Thinking; Analytical Thinking

AICPA:  BB Critical Thinking